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    Appreciating the Market

    Mar 30 • Demand, Supply, and Markets, Economic Thinkers, Government • 202 Views

    In a recent WSJ interview, Nobel laureate Gary Becker tells us that, “Markets are tough to appreciate.” The reason, he says, is people feel government can better care for them than a profit seeking individual. Calling markets counterintuitive, Becker sees why people question the benefits of a system that seems to harm the unfortunate. For him though, the key is economic growth which only a market can create.  

    Becker also comments on the cost of health care. Implying that incentives rather than government provide the solution for cutting health care costs, he compares health care spending in Switzerland and the United States. Yes, the Swiss spend close to 11% of GDP on health care and we spend approximately 17%. However, for him, insight comes from asking who does the spending. In Switzerland, 31% of the total is from individuals;  for us, only 12% of total health care spending is an “out-of-pocket” expense. 

    Hearing Gary Becker’s ideas reminds me of a quote from William Bradford about Plymouth Plantation in 1623: “So they began to think how they…could…obtain a better crop than they had done…At length…the Governor…so assigned to every family a parcel of land…This had very good success, for it made all hand very industrious…”

    The Economic Lesson

    Whether your bias is more government or less, still we always can conclude that the incentives created by a decision will determine its outcome.

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    Hot Wing Markets

    Mar 29 • Businesses, Demand, Supply, and Markets • 149 Views

    Opening on April 1 in NYC, the Exchange Bar & Grill has food and drink prices that respond instantaneously to demand.  As described in a Reuters article, if everyone wants hot wings, then, in $.25 increments, the price increases; if no one wants them, the price drops. Prices, though will not fluctuate more than $2 higher or lower than a base number.  That means that you would not pay more than $9.00 or less than $5.00 for 6 hot wings because their starting price is $7.00. The restaurant has a ticker tape that will display price fluctuations.

    The Economic Life

    I have been wondering how we might graph the changing price for hot wings. Is quantity supplied constant or upward sloping? Is the demand curve shifting? Or do we just have a horizontal perfectly elastic supply curve that moves when management shifts it?

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    No Longer a Sin?

    Mar 28 • Economic Thinkers, Government • 173 Views

    Pondering health care reform, I began to wonder whether sin taxes would become Pigovian taxes.

    A sin tax focuses on the impact of a behavior on an individual. Levied on something that society believes is “bad” for a person, a sin tax typically targets habits like smoking or alcohol consumption. Its goals involve generating revenue and minimizing the behavior. 

    By contrast, a Pigovian tax focuses on the impact of a behavior on society. Air pollution, for example, can harm the people who live near a noxious factory. If untaxed, the factory continues producing while society suffers. However, if the factory has to pay when it pollutes, production becomes more expensive.  As a result, the supply of the item decreases and society is compensated.

    Have societies with universal health care coverage transformed sin taxes (which relate to the individual) into Pigovian taxes (which impact society)?

    The Economic Lesson

    First defined by Arthur Pigou (British economist, 1877-1959), a Pigovian tax increases the cost of an activity involving two parties that has a negative impact on a third, unrelated group.  Also called a negative externality, the harm experienced by the third party reflects a failure of the market to price the activity accurately because the market did not account for its cost (harm). When a tax or a fee is imposed, the cost of production increases. Consequently, the item’s supply curve shifts leftward. 

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    Yuan or Yen

    Mar 27 • Demand, Supply, and Markets, International Trade and Finance • 178 Views

    Harvard professor Niall Ferguson, called China a currency manipulator in a recent interview. Next month, Treasury Secretary Tim Geithner will let us know if he agrees. The United States has not formally called China a currency manipulator since 1994.   

    According to a Planet Money podcast, this is why China could be called a currency manipulator:

    1) A U.S. business buys Chinese made goods. 2) The U.S. business pays for its purchase in dollars. 3) Needing yuan and not dollars, the Chinese factory uses its dollars to demand yuan at a local bank. 4) Here is the tricky part. Lots of quantity demanded for yuan should shove its price up.  But it does not. Why? Because the Chinese government adds to the yuan supply which shifts the supply curve downward and maintains the price of the yuan. China’s intervention could be called currency manipulation.

    Next question.  Why should we care?  We care because when a currency is too cheap, world demand for that nation’s goods soars and production elsewhere suffers.  If left alone, though, currencies self-correct. As quantity demanded increases for a cheap currency, it becomes more expensive. Soon, people buy fewer goods from that country and more from other nations whose goods become relatively cheaper.  Like a seesaw, currency values go up and down, always equalizing as long as governments do not interfere.  

    The Economic Lesson

    How does money become more or less expensive? As always, it is all about demand and supply. Buyers want more goods and services that they buy for yuan or yen when they are cheap and less when they cost more.

    Yuan or yen?  If each fluctuated freely, it would depend on demand and supply.

     

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    The Tip of the Iceberg?

    Mar 26 • Government, Macroeconomic Measurement, Thinking Economically • 160 Views

    Growth or a safety net? Thinking at the margin, an increasing number of European policy makers are debating a change.

    The result is a classic economic dilemma. Unemployment and medical insurance, pensions, licensing protections, and job guarantees can each tug GDP downward if they are government mandated. Between 2000 and 2007, eurozone economic growth averaged a sluggish 1.7%. By contrast, though, millions of individuals lead better lives because of government support. Thinking at the margin, the tradeoff is more growth or a bigger safety net. Because of scarcity, we cannot have everything.

    Greece’s fiscal problems are a consequence of enlarging the safety net. One Chinese official is quoted as saying the Greek fiscal crisis is only “the tip of the iceberg.”  Implying that the choice has to be a smaller safety net, he believes that the spending problem extends far beyond Greece to the entire eurozone.  

    Interesting facts:  According the OEDC, average number of actual working hours in 2008:  US: 1792, Netherlands: 1389, France: 1542;  But why is Greece 2120? Korea exceeds all and has the least vacation time.

    The Economic Lesson

    Economically speaking, the definition of scarcity is limited quantities. Because there are limited quantities of the factors of production (land, labor, capital), whenever we allocate resources for one good or service, we have less to use elsewhere.  The only remedy is economic growth.

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